Property Investment Company and Inheritance Tax

May 13, 2022

Set up correctly a property investment company can save you income tax, obtain full tax relief of mortgage interest, inheritance tax and a host of other tax planning opportunities. Here we examine how this works for Inheritance tax.

Reducing the taxable value in your estate given, the unavailability of Business Property Relief on residential property is a major concern for landlords. When using a property investment company you may be keen to mitigate the IHT liability attaching to your shares. At the same time, you may also be reluctant to pass too much of the company’s current value over to the next generation and may wish to retain the current dividend flow.

In these circumstances, it may be worth you considering a form of planning using so-called “freezer” shares. The intention is to freeze the value of the shares belonging to you so that future growth in value accrues to their intended beneficiary – typically the next generation.

In simple cases, this is achieved by altering the company’s Articles of Association to divide the company’s shares into two classes, A and B shares. The A shares carry an entitlement to dividends and/or capital on winding up equivalent to the current value of the company and are retained by you. The important thing to note here is that when incorporating the company, your current value is equivalent to the nominal value of your A shares. i.e. £1 per share as there are no other assets in the company.

All future growth in the value of the company will accrue to the B shares which will be given to your children or perhaps to a trust that benefits succeeding generations. At this point, there should be no IHT implications inherent in this planning. The new B class of shares will have only a nominal value as initially they have no voting rights, no dividend rights and no capital value above their face value.

There has been no significant transfer of value because the value of the existing shares is not substantially reduced. On your death, you will be taxed only on the value of the company at the date the two share classes were created.

Each case is individual and we strongly advise that you take professional advice to fully understand the use of a property investment company and Freezer Shares. With our set-up costs starting at just £500+VAT for simpler cases the tax savings this brings make this a very affordable tax planning option for all property investment company owners. For a consultation please get in touch on 0800 907 8633, via or online.

If you found this article informative then why not read our closely related article on residence nil rate band 2021/22 or our guide to property allowance?

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